Strathcona Resources – Disappointing Q3 results

[Petroleum economist]

Strathcona is a Canadian midcap (market value US$ 6.1 B) with heavy oil and bitumen production, as well as gas/condensate production. Strathcona public float is limited to 9% of the total. The rest owned by WEF.

Strathcona reported disappointing Q3 results. Production was below expectation. Short-term and long-term production outlooks were lowered. The equity ratio improved, but long-term debt increased. Profit was below expectation, but costs were controlled. Shareholder returns are low, but can increase over time.

Production
• Production continued to fall.
• Q3 production (178.2 K BoE/d) was 2% below Q2 (181.8 K BoE/d) and 4% below Q1 (185.1K BoE/d).
• I had expected a far higher Q3 production (187 K BoE/d). Q3 production was constrained by closed-in gas (15 mm scfe/d= 2.5 K BoE/d) due to low gas prices.
• Strathcona provided a Q4 outlook of 185-190 K BoE/d. I reduced my expectation accordingly to 188 K BoE/d.
• Strathcona 2024 outlook was lowered from 185-195 K BoE/d to 183 K BoE/d. My lowered estimate is matching.
• Strathcona initiated a 2025 outlook of 185-195 K BoE/d. I lowered my expectation to 193 K BoE/d.
• Strathcona wants to grow production over time to 200 K BoE/d (2026), 220 K BoE/d (2027) and 240 K BoE/d (2028). All numbers are well below a previous outlook, which I ignored anyway, because it looked too optimistic.

Balance sheet
• Q3 equity ratio (=equity/balance sheet total) was an acceptable 56.8% and up 3.8% on Q2 (53.0%).
• Q3 long-term debt (C$ 2,450 M) was up C$ 104 M versus Q2 (C$ 2,346 M).
• Debt/EBITDA ratio in 2024 should be close to a good 1.0 and could improve to 0.85 and less in subsequent years.
• The balance sheet can do with some strengthening in 2025.
• The balance sheet allows (modest) shareholder returns.

Profitability
• Q3 eps (C$ 0.88) was well below Q2 (C$ 1.06).
• The eps drop was due to slightly lower production and lower oil prices. Production costs (blending, operating, transportation) and royalties (10.5%) were lower than expected.
• For 2024, with WTI at $ 71.77/bbl, I expect a net eps of C$ 3.24 (PE=8.9).
• The eps can increase to C$ 3.31 (PE= 8.9) in 2025.
• With growing production and higher gas prices, the eps can increase to C$ 4.45 (PE=6.6) in 2028.
• Strathcona is a profitable company.

Shareholder returns
• Strathcona does not buy back shares.
• An initial quarterly dividend of C$ 0.25 was introduced in September 2024 and will be repeated in December. The dividend equals a meagre yield of 1.6% in 2024
• With the quarterly dividend of C$ 0.25 sustained in 2025, shareholder returns increase to 3.2% in 2025.
• Over time the dividend can go up to C$ 1.60-2.00 in 2027/2028 (=shareholder return = 6-7%).

Conclusions
Strathcona reported disappointing Q3 results. Production was below expectation. Short-term and long-term production outlooks were lowered. The equity ratio improved, but long-term debt increased. Profit was below expectation, but costs were controlled. Shareholder returns are low but can increase over time.

Strathcona dropped in the oil and gas company ranking to 22nd (out of 82) but still is in the top 25.